September worries investors and for good reason. Historically, it's proven to be a lousy month for the market.

The month of September gives equity investors a sinking feeling and for good reason: Historically, this has proven a bad month for the stock market.

Certainly, as summer comes to a close, investors have already suffered a tough stretch. The S&P 500 declined 3.4% month-to-date through August 27, recording its fourth month of decline and a 4.5% year-to-date shortfall.

Factors contributing to this month’s market activity, say market pros: the end of the second-quarter EPS euphoria; downward revisions to consensus projections for real US GDP growth for the remainder of 2010 and 2011, exacerbated by worse-than-expected employment and housing data; and a slumping yield on the 10-year Treasury note fanning fears of a double-dip and deflation.

(As we write here in the midday on Monday, the SPDR S&P 500 ETF (SPY) -- which includes holdings like Exxon (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC) -- is down 0.4%)

But if history is any guide, strategists emphasize, we may be in for another rough ride as September now kicks off. S&P’s Sam Stovall notes that the S&P 500 has posted its worst monthly return in September whether you go back to 1990, 1970, 1945, or 1928.

Another reason to worry: The mid-term election could put additional pressure on the benchmark this month, Stovall says. Since 1930, the S&P 500 declined an average 1.7% in the September before the mid-term elections and recorded a 52% frequency of decline.

“Of course there’s no guarantee that what happened in the past will happen again, but it certainly sets an ominous precedent,” Stovall says.

So the historical pattern appears clear: September is often a lousy month for the stock market. The explanation for the pattern, however, is less obvious. James Swanson, chief investment strategist at MFS Investment Management, says that he has yet to hear a credible reason why the month of September historically has proven a cruel one for investors.

“The odds are stacked against your for sure,” says Swanson. “But I haven’t heard of any good explanation that holds up.”

Regardless, says Swanson, the historical pattern seems apparent, and he’s betting that September will go as expected: down. However, while traders might dodge in and out of the market based on this historical pattern, Swanson doesn’t believe investors should sell out of equities based on the history of September’s poor performance.

“Timing the market by monthly returns, given tax implications, is not helpful,” Swanson says. “Now, with new money, you are perhaps wiser to hold off. But I certainly wouldn’t rearrange my whole asset allocation program based on one month. Traders do. But it doesn’t make sense for investors.”

Burt White, LPL's chief investment officer, eyeballs some catalysts ahead that he says might move the market higher, including the next FOMC meeting on September 21 in which central bankers could announce an expansion of quantitative easing, or additional purchases of securities designed to keep long-term interest rates low.

“You could easily get the ‘buy the rumor, sell the news’ as to what the Fed will do,” White says. “We may get a market that expects it and demands it by rallying into the meeting.”

Also, White notes that sentiment readings seem downbeat. The latest bullish sentiment reading from the American Association of Individual Investors, for instance, reached its lowest levels since the depths of the bear market in March 2009. The reading is currently down at 20.7% (hat tip: Bespoke Investment Group).

From a contrarian perspective, White reminds us, all this bearishness is bullish.

No positions in stocks mentioned.

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